RBI releases final guidelines for new bank license

MUMBAI: The Reserve Bank of India today issued the much-awaited guidelines for new bank licences, allowing corporates and public sector entities with sound credentials and a minimum track record of 10 years to enter the banking business.

The Reserve Bank, which has laid down an elaborate 'fit and proper' criteria, has not excluded any category like brokerages, real estate companies from entering into the banking space as has been advocated by the Finance Ministry.

The final guidelines pave the way for corporate houses like Anil Dhirubhai Ambani Group, Larsen & Toubro, Tatas, Mahindra and Mahindra, Life Insurance Corporation and Aditya Birla Group to enter the banking business.

"Entities/groups should have a past record of sound credentials and integrity, be financially sound with a successful track record of 10 years," it said.

The minimum paid-up capital for setting up a bank has been pegged at Rs 500 crore.The cap on the foreign investment, including FDI/FII and NRI, has been set at 49 per cent.

As per norms notified by RBI, on receipt of licence, promoter has to start operations within one year and list the company within three years of commencement of the business.

Also, new banks should open at least 25 per cent of branches in unbanked rural centres.

Those seeking to set up a bank would have to submit applications by July 1, 2013. The RBI will display names of applicants on its Website.

Before granting licences, RBI would seek feedback about applicants from other regulators, enforcement, investigative agencies like I-T Department, CBI, ED, as deemed appropriate.

The rules issued today is the culmination of three-year process. RBI will now begins taking applications for bank licenses for the first time in a decade.

At present, there are 26 public sector banks and 22 private sector banks. Only 35 per cent of India's adult population has accounts with banks and other financial institutions as compared to a global average of 50 per cent. It is 41 per cent in case of developing economies.

Following the grant of licence, the promoter group, which could be a public sector entity as well, will be required to set up a wholly-owned Non-Operative Financial Holding Company (NOFHC).

The NOFHC is aimed at protecting the banking operation from extraneous factors like other business of the Group i.e., commercial, industrial and financial activities not regulated by financial sector regulators.

Â To ally fears of conflict of interest that may arise if a corporate entity opens up a bank, the notification said: "The RBI will have to be satisfied that the corporate structure does not impede the financial services entities held by the NOFHC from being ring-fenced, that it would be able to supervise the bank, the NOFHC, and its subsidiaries/joint ventures/associates on a consolidated basis...."

Existing non-banking financial company (NBFC) will be eligible to apply for a bank licence.

If considered eligible, NBFCs may be permitted to promote a new bank or convert themselves into banks, it said.

According to norms, the business plan has to be realistic and viable and should address how the bank proposes to achieve financial inclusion.

The new entity will have to comply with the priority sector lending targets and sub-targets as applicable to the existing domestic banks, it said.

Banks promoted by groups having 40 per cent or more income from non-financial business will require RBI's prior approval for raising paid-up voting equity capital beyond Rs 1,000 crore for every block of Rs 500 crore.

The guidelines said the NOFHC will hold the bank as well as all the other financial services entities of the group regulated by RBI or other financial sector regulators.

"The general principle is that no financial services entity held by the NOFHC would be allowed to engage in any activity that a bank is permitted to undertake departmentally," it said.

Commenting on the norms KPMG Partner and head of financial Services Tax Naresh Makhijani said the guidelines are now complete in all respects. RBI is eying entities with deep pockets, impeccable track record and financial inclusion in mind. According to RBI norms, the NOFHC will initially hold a minimum of 40 per cent of the paid-up voting equity capital of the bank which shall be locked in for a period of five years and which shall be brought down to 15 per cent within 12 years.

The holding company will be registered as a non-banking finance company (NBFC) with the RBI and will be governed by a separate set of directions issued by RBI.

"The NOFHC and the bank shall not have any exposure to the promoter group. The bank shall not invest in the equity or debt capital instruments of any financial entities held by the NOFHC," RBI said.

Â With regard to corporate governance, the new guidelines said at least 50 per cent of directors of the NOFHC should be independent directors.

The corporate structure should not impede effective supervision of the bank and the NOFHC on a consolidated basis by RBI, it said.

As regards procedure for grant of bank licence, RBI said applications will be screened by the central bank itself before being forwarded to the high level advisory committee for further scrutiny.

The Committee, to be constituted shortly by the RBI, will submit its recommendations to the Reserve Bank. The decision to issue an in-principle approval for setting up of a bank will be taken by the central bank.